Looking for exposure to the foreign exchange market? Currency Exchange Traded Funds (CETF) are an option worth considering.
CETFs act as vehicles for portfolio diversification, hedging and speculation in the largest and possibly most liquid financial market. According to the Bank for International Settlements, trillions of US dollars are traded in the forex market every day, mainly by institutions. Private customers contribute on average about 5% of the total volume. As a trading center, London accounts for almost half of the total activity.
The value of a currency is usually determined by interest rates, economic developments, national and global politics. There is a wide variety of funds covering different currencies as well as ETFs with both long and short () positions and triple long and short funds.
Here we will take a closer look at one of the major currency ETFs on the market:
Invesco DB US Dollar Index Bullish Fund
Current price: $ 24.90
52 Week Range: $ 24.64 – 28.90
Expense Ratio: 0.77% per year, or $ 77 with an investment of $ 10,000
The Invesco DB US Dollar Index Bullish Fund (NYSE 🙂 allows investors to track the value of the dollar against a basket of six major world currencies, ie, the, ,, and. They represent the currencies of some of the US's major trading partners
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The fund has exposure to futures contracts in the (USDX), possibly the most recognized currency index in the world. The USDX is heavily exposed to the Euro, as well as other European currencies. Since UUP goes long with the US dollar and goes short with the currencies of major US trading partners that use USDX futures, the fund will go down when the euro rises.
UUP is currently setting new lows. The fund's current downward trend accelerated in the second half of May. It's now around the September 2018 levels where it may find support – at least for some time. However, if the decline continues, a decline towards the USD 23 level is likely.
Going back to the post-crisis time frame of 2008/09, UUP's performance at the time was also negative as the dollar declined. Many analysts question whether the trajectory or underperformance of UUP will be similar during the COVID-19 pandemic.
The US dollar generally has long periods of appreciation and depreciation. Since moves can become long and extended, it may be premature to speculate that the downtrend will end soon.
Despite its recent decline, the USD remains the world's leading currency and the UUP will eventually flip higher.
However, a number of factors are likely to influence the timing and magnitude of the next potential rise. In part, it will depend on how quickly the US economy will recover, especially relative to the major European economies. Short-term moves may also be prompted by news of regulatory approvals of a possible coronavirus vaccine, economic data releases and the upcoming US presidential election.
For the rest of the year, economic data is likely to continue to hamper the safe haven status of the US dollar. A possible delay in announcing the winner of the presidential election would also negatively affect the value of the currency. For any upward move to become a long-term trend, UUP should stay above $ 26.
Bottom Line
In 2020 asset classes witness the struggle for the safe havens leading to an increase in financial markets. Investors seeking exposure to foreign exchange movements may want to consider buying in CETFs. In the coming weeks we will revisit the topic and discuss several other funds, including:
Invesco CurrencyShares® Euro Trust (NYSE 🙂
Invesco CurrencyShares Japanese Yen Trust (NYSE 🙂
Invesco CurrencyShares British Pound Sterling Trust (NYSE 🙂
ProShares Short Euro (NYSE 🙂
WisdomTree Chinese Strategy Fund (NYSE 🙂
WisdomTree Emerging Currency Strategy Fund (NYSE 🙂
